Associated Banc-Corp — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. The filing is unaudited. Associated Banc-Corp is a Wisconsin-based financial services company. Comparisons are substantially affected by its February 1, 2018 acquisition of Bank Mutual.
Financial performance
| Metric | Q3 2018 | Comparable period / change |
|---|---|---|
| Net interest income | $219.4 million | Up from $190.1 million in Q3 2017 |
| Net interest margin | 2.92% | 2.84% in Q3 2017; down 10 basis points sequentially from Q2 2018 |
| Net income | $85.9 million | Up from $65.0 million in Q3 2017 |
| Net income available to common equity / diluted EPS | $83.5 million / $0.48 | $62.7 million / $0.41 in Q3 2017 |
| Noninterest income | $88.3 million | Up 3% year over year |
| Noninterest expense | $204.4 million | Up 15% year over year; includes $2.3 million of Bank Mutual acquisition costs |
| Provision for credit losses | $(5.0) million | Compared with $5.0 million expense in Q3 2017 |
For the first nine months, net income was $244.6 million versus $179.3 million, diluted EPS was $1.38 versus $1.11, net interest income was $655.6 million versus $554.2 million, and net interest margin was 2.95% versus 2.83%. The nine-month provision for credit losses was a $1.0 million recovery, compared with $26.0 million expense in 2017. Noninterest expense rose 19% to $628.6 million, including $30.0 million of Bank Mutual acquisition costs. The effective tax rate fell to 18.34% from 27.99%, reflecting tax-law changes and tax-planning benefits, partly offset by a $6 million charge related to an unfavorable Minnesota Supreme Court ruling.
Balance sheet, funding and capital
- At September 30, total assets were $33.5 billion, loans were $22.9 billion, deposits were $24.8 billion, and stockholders’ equity was $3.8 billion. Since year-end 2017, assets grew 10%, loans 10%, and deposits 9%, with Bank Mutual a major contributor.
- Total funding excluding deposits was $4.3 billion, including $3.3 billion of FHLB advances and $795 million of other long-term funding. The company issued $300 million of senior notes in August at a 3.50% coupon, due 2021; $2.6 billion of FHLB advances were putable, and the company anticipated they would be called on their put dates.
- Regulatory capital ratios: common equity Tier 1 10.35%, Tier 1 11.42%, total capital 13.56%, and Tier 1 leverage 8.43%. Tangible common equity to tangible assets was 7.11% (a non-GAAP measure).
- Cash, cash equivalents and restricted cash ended the nine-month period at $546.3 million, down $169.7 million. Operating cash flow was $302.7 million; investing activities used $383.7 million and financing activities used $88.7 million. Management said the company met internal liquidity objectives and had sufficient asset-based liquidity under stressed scenarios; available capacity included $3.2 billion of FHLB advances and $2.2 billion at the Federal Reserve discount window.
Credit quality and material changes
- Nonaccrual loans were $154.1 million, or 0.67% of loans, down from $208.5 million and 1.00% at year-end 2017. Nonperforming assets were $186.1 million, or 0.56% of assets.
- The allowance for loan losses was $236.3 million, 1.03% of loans, covering 153.32% of nonaccrual loans. Nine-month net charge-offs were $30.1 million, or 0.18% of average loans, versus $28.8 million, or 0.19%, in 2017.
- Oil-and-gas loans totaled $731 million; $32 million were nonaccrual. The related allowance was $10 million, or 1.4% of that portfolio. Management identified this lending as a higher-risk segment.
- Bank Mutual added approximately $2.8 billion of assets, $1.9 billion of loans and $1.8 billion of deposits. Conversion was completed in Q2, and its bank merged into Associated Bank in June. The acquisition also added $175 million of goodwill and $58 million of core deposit intangibles. Other 2018 acquisitions included insurance businesses Diversified and Anderson.
- Available-for-sale securities had $141.6 million of gross unrealized losses at quarter-end, versus $68.0 million at year-end 2017; held-to-maturity securities had $78.0 million of gross unrealized losses, versus $25.8 million. Management attributed losses primarily to higher interest rates, did not consider them other-than-temporary, and said it did not intend or expect to need to sell the securities before recovery.
Outlook, risks and other notable items
The filing provides no numerical earnings or revenue guidance. Management described expected efficiency opportunities and economies of scale from Bank Mutual, but noted integration-related expenses and unallocated costs. Management reported that the balance sheet was slightly asset-sensitive under its interest-rate analysis: modeled 100-basis-point increases implied 4.9% higher 12-month net interest income in the dynamic forecast, while a 100-basis-point increase implied a 2.3% decline in market value of equity. Results depend on modeling assumptions; management noted that rate timing and magnitude are uncertain.
Key risks include credit deterioration, especially in oil and gas and potential-problem commercial loans; rising deposit and wholesale funding costs; interest-rate and securities valuation exposure; acquisition integration and realization of expected efficiencies; and regulatory, consumer-compliance, litigation and mortgage repurchase contingencies. The company disclosed pending legal and regulatory matters but said it could not estimate the potential loss for certain consumer-product matters. It recorded a $1.2 million mortgage repurchase reserve. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
After quarter-end, the company entered an accelerated share repurchase agreement expected to purchase approximately $59 million of common stock. The board also declared a quarterly common dividend of $0.17 per share, up $0.02 from the prior dividend.
Important facts for investors to verify
- How much of the reported earnings and balance-sheet growth is attributable to Bank Mutual, purchase-accounting accretion, and other acquisitions, and whether anticipated integration efficiencies are being realized.
- Whether loan quality and the allowance remain adequate as potential-problem loans, charge-offs and higher-risk oil-and-gas exposures evolve.
- How rising deposit and FHLB funding costs affect future net interest margin, liquidity and earnings sensitivity.
- Whether unrealized securities losses, acquisition-related goodwill and intangible assets, and the Minnesota tax ruling create further earnings or capital effects.
- The status and potential financial exposure of disclosed legal, regulatory, mortgage repurchase and off-balance-sheet commitments.